TL;DR: this is our take on the first time home buyer incentive currently offered by the government of Canada. For complete program details, please check out this article. If you would otherwise not be able to get the house you need to get, but you can do it with this program, it might be a good fit for you. If you think there's a possibility of moving within 5 years, then you should read this article in full.

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The new First time home buyer incentive offered by the Canadian government is an attractive program on the face of it. You put in a minimum 5% down payment, the government matches you with an interest free, long-term, no payment loan. Free money, right? Mostly that's true, but depending on your plans for the property, it may cost you more than you could potentially gain.

It will be useless for many borrowers

4x income rule

There is a 4x income rule where the property can only be worth maximum 4x your income. If you're single and make $50,000/year, and have low or no debt, you may qualify for closer to $240,000 on your own where you would be capped at $200,000 under the program. If you decide you want to purchase a property worth more than $200,000, you will not be eligible to take advantage of the incentive.

Suppose you would like to buy a property worth $400,000, but you make $140,000/year as a couple, you are also not eligible to take advantage because of the $120,000 maximum income rule.

High home prices

Looked at another way, high home prices could rule out the program. Since the maximum allowed income is $120,000 the maximum allowable mortgage is $480,000. In some markets, like Toronto and Vancouver, for example, $480,000 may not be nearly enough for the home someone needs. (the exact home price that results in a $480,000 total 1st + 2nd mortgage depends on the incentive amount taken).

The government participates in the upside and downside of the property's value

On the face of it, this seems more than fair. If you bought the house for $300,000 and the value goes up to $330,000, it's only fair the government gets their share of the increase in value. Likewise, if the value goes down to $270,000, then the amount you owe back to the government has also dropped by 10%. So far so good.

Home improvements

Where we think buyers are potentially forgetting to consider something, is if the home owner makes improvements to the property, on their own dime. Suppose you buy a new-build home, and you get the 10% incentive on a $400,000 property. By the time you sell the property 10 years later, you have spent $50,000 finishing the basement, you paid $15,000 for a new deck and landscaping, and you upgraded the flooring throughout the house, costing you another $15,000. Maybe you added a hot tub, or decked-out the garage or something, for another $10,000. Your investment into the property is $90,000 more than what you paid. Assuming no change in real estate market dynamics (not usually the case, but let's keep it simple for the sake of discussion) and you sell the property for $490,000, the amount you have to repay the government is $49,000 - or 10% of the sale price (because you took the 10% incentive in this example). In this example, you have given the government $9,000 of after-tax money because of the upgrades you paid for yourself.

Increase in market value

Another possible outcome is that the value of your property increases significantly during the time you own it, either due to upgrades like the example above, or due to market conditions. House prices have been rising steadily in Canada (on average), and if they continue, that $400,000 home you bought could be worth over $500,000 in 5-7 years. On your own, that $100,000 profit would be all yours, tax free (since it's your primary residence you don't pay tax on any gains). With a 10% incentive, you would be paying back $50,000, which is $10,000 more than the incentive you were given. That's $10,000 of tax free money, gone for good ($5,000 if you took the 5% incentive).

On the flip side, if you don't do any upgrades, and/or the value of the property drops in a market correction, you still only have to repay 10% of the sale price (or 5% if that's the incentive amount you got).

The second mortgage (the incentive amount) is not portable 

The incentive amount is repayable in 25 years, or when the property is sold, whichever occurs first. The second mortgage, the incentive, is not portable. If you buy your starter home, outgrow it and need to move, you will have to pay back the incentive amount when the sale of your home closes. Depending on the other factors affecting your finances - current mortgage rates, whether you are able or want to port your mortgage, whether or not a prepayment penalty applies - it may not be ideal to have to re-pay the incentive amount, but life events may force that decision for you.

We don't know yet how that could affect a future port+increase situation

What we don't know yet is how the lender on the first mortgage will treat the situation where the property is sold to upgrade to higher priced property. The incentive will have to be paid back because the property is being sold - that much we know for sure. We know some amount of new money will need to be added to the mortgage to cover for the higher priced property and the repayment of the incentive.

There are already many moving parts and many options during a purchase/sale transaction, and it's not clear which of those will or won't be available as a result of this program. How the primary lender treats the sale of the property, and what terms/conditions of your mortgage are triggered/not triggered, may have an effect on what options are available, and therefore your total cost of borrowing.

In summary

If you are one of the few whose situation actually fits the program, and you are going in with your eyes wide open as to the potential risks and benefits, then this program could save you a significant amount of money on interest expenses. On the other hand, if you think there's a chance you could upgrade the home and don't want to give a share of that away, or if you might move, then it might not be the right program for you.

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